AMAG-Allos, a Match Made in Necessity

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What do you get when you combine one unprofitable biotech, AMAG Pharmaceuticals (Nasdaq: AMAG  ) , with another unprofitable biotech, Allos Therapeutics (Nasdaq: ALTH  ) ? A slightly larger biotech that's still unprofitable.

And a bunch of cranky investors. Allos' shareholders will receive 0.128 shares of AMAG in the all-stock merger, which valued Allos about 18% higher than the closing price on Tuesday. But AMAG's investors weren't impressed, sending shares down more than 14% yesterday. That dragged down Allos, which lost all its premium and an additional 6% of its value.

I wouldn't say this is the worst biotech merger ever. That distinction is still held by cancer-drug expert OSI Pharmaceuticals' purchase of Eyetech. The unnecessary acquisition didn't have any obvious synergies and seemed highly overpriced.

AMAG and Allos certainly have the necessity one covered. Both AMAG's Feraheme and Allos' Folotyn have been utter disappointments, as evidenced by the fact that both companies are trading well off the highs set after the drugs were approved in 2009.

The synergies are somewhat limited. There's the elimination of management positions and buildings, which should save the company between $55 million and $60 million per year.

The drugs themselves are an OK fit. Feraheme treats patients with low iron levels, and Folotyn treats a type of lymphoma. AMAG estimates that 30% of Feraheme usage last year was in the hematology oncology space, which has jumped to 50% this year. That's not as good as combining two blood-cancer drugs, but at least there's a little overlap.

When might the combined company be profitable? Management isn't saying. Best we got is that the company has more than $370 million in cash and equivalents, which management says should be enough to get to profitability. Since there will be between $35 million and $38 million in one-time costs cost to achieve the projected synergies, we can assume that profitability in 2012 might be a stretch.

At this point, the best outcome for AMAG-Allos might be to hope that the combined company is a more attractive takeover target than each one is individually. Blood-cancer specialist Celgene (Nasdaq: CELG  ) would be a good fit, but it sells a drug that competes with Folotyn. A spec pharma acquirer such as Spectrum Pharmaceuticals (Nasdaq: SPPI  ) could be an option, although it tends to avoid overpaying.

Can one and one equal more than two? If so, it's going to take a while to see those kinds of results with AMAG-Allos.

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Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On July 22, 2011, at 6:14 AM, retiredpharma wrote:

    Dear BO,

    Yes its true that this marriage between AMAG/ALTH is out of nescessity, but what we may be missing here is that,

    ""Nescessity is the Mother of Invention!""

    Two companies here are trying to reinvent themselves at a difficult time. When they come out on the other side, they hope to be stronger,leaner, meaner and more competitive!

    I believe strongly they will and have backed both w/ my money!

    For the Life of me and I own shares in both I do not see why people are so upset other than it appears AMAG is getting ALTH at a very fair price relative to what ALTH is worth today given a limtd rrPTCL indication!

    There are 10,000 PTCL patients, and ~30,000 oncology pros in the US by some estimates, and yet the group is hopelessly MISDIAGNOSED and treated inferiorly, and ALTH w/ a limtd sales force of 50 reps, ok 1 per state to call on all these H/O healthcare pros continues in vain to educate the diagnosis properly, requires tremendous FOCUS!

    ALTH had a major presence at this years ASCO mtg. with a great Booth location next to BMY...I heard the traffic was strong and they gave out a valuable Oncology book to all who signed up...

    ALTH sponsored major new educational Folotyn treatment symposia in PTC-Lymphoma at ASCO and two EU meetings in June!!!

    I expect Q-3 to reflect an uptick in Folotyn awareness and trial use by the PTCL community! ASCO had a huge turnout again this year and the docs have now seen the newer data reflected below...and the new COMPLETE International Registry is online...

    Information regarding the key presentation at EHA is as follows:

    Abstract Title: "Pralatrexate Selectively Induces Apoptosis and Synergizes with Bexarotene Through Up-Regulation of p53/Bax/PUMA in Cutaneous T-cell Lymphoma Cells"

    Abstract Number: 405

    Presentation Date/Time: Friday, June 10, 17:45-19:00 CET

    Information regarding the presentations at ICML is as follows:

    Abstract Title: "Pralatrexate Reverses the Trend in Progressive Resistance with Successive Chemotherapy Regimens in the Treatment of Relapsed or Refractory Peripheral T-cell Lymphoma (PTCL)"

    Abstract Number: 361

    Presentation Date/Time: Friday, June 17, 08:30-18:30 CET

    Abstract Title: "Pralatrexate, an Effective Single-Agent Second-Line Treatment Following Failure of Cyclophosphamide/Doxorubicin/Vincristine/Prednisone (CHOP) in Patients with Relapsed/Refractory Peripheral T-Cell Lymphoma (PTCL)"

    Abstract Number: 360

    Presentation Date/Time: Friday, June 17, 08:30-18:30 CET

    Abstract Title: "Comprehensive Oncology Measures for Peripheral T-cell Lymphoma Treatment (COMPLETE), a New International Treatment Registry"

    Abstract Number: 242

    Presentation Date/Time: Thursday, June 16, 08:30-18:30 CET

    I think AMAG is getting quite a good deal here, and I would suggest that upon approval(pending) first line PTCL in the US, as well as EU, Asia approvals and future CTCL approvals we could see a major EXPONENTIAL jump in use of Folotyn!

    It is w/ this in mind that I believe AMAG made this investment!These approvals would be worth $100's of millions in new Folotyn sales, and ALTH has a great EU partner who in Mundi Pharma who is sharing that cost( A:M )60:40 soon to be 50:50 to get those EU, other approvals!

    For AMAG to offer 268M for this deal seems quite reasonable given ALTH is sitting on $120M in cash now, Mundi having just entered into the partnership deal w/ $50M upfront and milestones of $310M!ALTH had $79M in cash as of 3/31/2011 and much reduced burn!

    So AMAG pays ALTH .1282 shares of AMAG for all this? Wow, AMAG is schrewd and I have given them too little credit! This deal is even more clever than BMY buying Medarex to get Yervoy(Ipilumumab) imo!

    I say the markets will come to appreciate what I and apparently AMAG and ALTH both know!

    The synergies are fine, the cost cutting is great, the morphed new company Alamo Sub will have greater Share of Voice, Reach and Frequency , and scale w/ both Folotyn and Feraheme!

    ..but the biggest thing will be Folotyn sales ramping double digit and more, upon the new approvals....that loss leader effect w/ pull Feraheme along and both will grow spectacularly imo, especially in the out years 2012-2015!

    I think I will hold onto my $500K investments in both companies!


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